Companies Petition Obama For Tax Amnesty To Repatriate Cash, As Myth Of "Cash On Sidelines" Crumbles
About a month ago, when discussing the debunking, for the latest time, the biggest lie in modern history, namely the massive exaggeration about the corporate cash on the sidelines, we noted: "Our advice to all those who like blind lemmings follow the advice and chase the "cash hoard" - think, and do your homework first. If indeed over a third of the record cash holdings are foreign, they are as good as useless to shareholders." The reason for this: a major portion of the billion or so dollars in cash is held abroad and "repatriating this cash to the good old USA would cost companies hundreds
of billions in US corporate taxes. That's right: even though companies
are taxed abroad, the issue of double taxation is resolved by
subtracting foreign taxes paid from the US tax liability. However,
because foreign corporate taxes are typically lower there is an adverse
tax consequence associated with remittance to the parent company.
In other words, of the $1.2 or however many trillions in total
corporate cash on balance sheets, a good 30% chunk of this belongs to
Uncle Sam if these companies wish to use it for domestic IRR purposes.
And yes, just so there is no confusion: using foreign cash to pay dividends or share repurchases is considered repatriation from the perspective of US tax regulations." And now that the cat is out of the bag that the huge cash hoard is really about 30% less, here come these very same multinationals begging Obama for tax amnesty so they can actually bring the cash home and, gasp, use it. Too bad this request will never fly, and why even CNBC may soon (with a few cartoons), understand just how stupid they sound in pumping the hollow cash on the sidelines argument day in and day out.
From the FT:
US multinational companies are clamouring for a tax holiday to repatriate billions of dollars “trapped” overseas but are being rebuffed by Barack Obama’s administration.
JPMorgan research estimates that 30-40 per cent of the almost $1,000bn in cash held by non-financial S&P 500 companies is in foreign jurisdictions.
The treatment of “cash on the sidelines” is becoming an increasingly pointed political and economic issue in the sluggish recovery, with Republicans blaming uncertainty created by Democratic healthcare and financial reforms for companies’ reluctance to invest and create jobs.
But some large groups say that US tax rules are a more important barrier. JPMorgan estimated that for some companies, so-called trapped cash amounts to more than 75 per cent of cash balances. To use the cash domestically, they would have to pay tax, typically of 25-35 per cent.
“We do have overseas cash and we would be very supportive of a repatriation holiday,” said Keith Sherin, chief financial officer of General Electric. “If you think about it, there is a lot of cash trapped overseas. If companies could bring that back at more competitive tax rates, I think it would be good for the US economy.”
And while cash assets may well be non-recourse, the debt is fully US funded, and explains why a cash cow like Microsoft had to issue debt despite having quadrillions in cash.
Sceptics, including in the administration, say the cash level alone is not a good guide to investment firepower as it ignores corporate debt levels. They also warn that Congress could raise hopes of more tax holidays; that repatriated cash might well be paid to shareholders rather than lead to job creation; and that a lack of investment is not the most pressing economic problem. The Treasury declined to comment.
“Some of our clients tell us that this issue is among the most distortionary elements of their financial policy,” said Marc Zenner, managing director in the corporate finance advisory group at JPMorgan. “It interferes with the optimal allocation of capital, restricting the use of that cash for strategic transactions or to return funds to shareholders.”
We hope that as more of the mainstream media comes to the conclusion we had on Zero Hedge a month ago, the straw man bullshit argument of record cash will finally be put to rest. And as the thesis is playing out exactly as expected, we would once again like to suggest the trade we proposed last time we discussed this topic: "buy CDS in IG/XO companies with lots of foreign cash and hedge
DV01 with CDS in those companies with domestic cash, preferably at same
level. Then sit back and wait for the divergence."